The Hindu Business Line : Component makers reel as auto sector skids

Chennai, Dec. 27 The auto component industry is convinced it is seeing a repeat of the 1997 low, only this time it will be tougher and last longer — through 2009 and 2010.

Parts manufacturers are shutting plants, laying off casual workers and cutting costs. With OEMs witnessing a drastic drop in sales, the business for Tier 1 and 2 companies has reduced substantially. Things were dramatically different at the beginning of the year, when the Nano was launched at the Delhi Auto Expo in January.

Nano and after

The Rs 1-lakh car was expected to be the acid test for suppliers when it came to meeting the cost challenge at levels unheard of before. . The project was shaping up well and ready to roll until the events in West Bengal resulted in the Tatas shifting the project to Gujarat. The order book for the Nano this fiscal is barely a tenth of the one-lakh units initially projected.

The 55 vendors who had invested in Singur lost close to Rs 700 crore on land and construction costs. A large part of this is expected to be borne by Tata Motors. Most of the vendors submitted proposals for compensation but by then the global meltdown had begun affecting India.

Squeeze in Europe, US

Bigger and more ambitious component makers who had worked out a global business model are discovering that their acquisitions in Europe are turning out to be a financial burden with low capacity utilisation, as carmakers in that part of the world are also shutting down plants. Europe’s cost structure, especially wages, is more prohibitive than India’s. Vendors who spoke to Business Line on condition of anonymity admitted that things would get tougher in the coming months.

The other disturbing news, of course, emanated from the US when General Motors and Chrysler announced they were rapidly heading towards bankruptcy. Analysts say it is only a matter of time before Ford is hit.

Export fears

North America and Europe contribute to 66 per cent of India’s component exports, which could nosedive next year. Most of these exports are from Indian Tier 2 companies to Tier 1 counterparts catering to the big three that are now in near-collapse stage.

“We can only keep our fingers crossed and hope for the best,” sources said. However, the bigger blow came from the Export Credit Guarantee Scheme (ECGS), which froze issue of fresh Credit Risk Insurance cover to theGM, Ford and Chrysler suppliers.

For the first half of this year, the component sector was showing promising growth. Exports also looked good with international automakers sourcing from India, thanks to its twin advantages of high quality at low costs.

Between April and September, exports grew by about five per cent till the fall began from October. The forecast is that growth may remain under five per cent and even negative in the worst-case scenario. To juxtapose, the industry posted seven per cent growth last fiscal and 18 per cent in 2006-07.

Volumes hit

Even before the US financial sector collapse happened, ancillary suppliers were under pressure due to increase in raw material prices. Margins fell but the suppliers hoped volumes would not fall. But the order book fell even as raw material prices dropped.

Private sector banks stopped vehicle financing, leading to a fall in demand, and loans for working capital became dearer. All these led to a demand contraction, and squeeze on profits and cash flow.

Vendors in the Micro Small and Medium Enterprises (MSME) sector have taken a severe beating as they depend on traders to source raw materials. Despite the Government declaring a reduction in prices, the traders have not effected the change. Government agencies are willing to help MSMEs in raw material supplies provided they commit to an offtake. But the companies are unable to commit owing to the slowdown in demand.

As production of commercial vehicles dropped, some OEMs began seeking discounts on outstanding payments while a few others resorted to imports from China.

If the situation continues, the component industry may end the fiscal maintaining last year’s turnover of $18 billion or even slip to negative growth.

More Stories on : Automobile Components | Economy | Tata Motors Ltd

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Farm debt relief evokes lukewarm response

Air India 1 busier with Manmohan than with Vajpayee

Weekly News Round-up

Component makers reel as auto sector skids

Satyam defers Dec 29 Board meeting

SBI Web site hacked, but no data loss

Banks offer card protection schemes to attract customers

Market decline is steep while fall in FII holdings is not